‘Explosive Growth’ Of US Shale Oil Stokes OPEC Fears

Date: 21/01/18

Bloomberg

OPEC’s fear that another surge of shale oil could neutralise its production cuts might be coming true.

US oil output is set for “explosive” growth this year as prices rally, the International Energy Agency said on Friday. That was just one of a chorus of voices from Goldman Sachs group Inc to Opec itself warning of a looming output surge reminiscent of the “heady days” of the first shale boom.

As the Organization of Petroleum Exporting Countries and allies including Russia gather in Oman this weekend, achievements including a three-year high in oil prices and rapidly dwindling supply glut may be overshadowed by the risk of becoming victims of their own success.

“The big 2018 supply story is unfolding fast in the Americas” the IEA said in its monthly report. “Explosive growth in the US and substantial gains in Canada and Brazil will far outweigh potentially steep declines in Venezuela and Mexico.”

Even with the moderate price response to the Opec-led cuts during most of 2017, rival suppliers still managed to bounce back with output growth of 700,000 bpd, the IEA said. As producers react to the recent surge in Brent crude above $70 a barrel, the agency expects non-Opec supply to expand by 1.7mn this year, the biggest jump since the peak of the shale boom.

That would deliver an unsatisfying outcome for Opec and its allies in 2018. Rival suppliers would be handed the entire 1.3mn bpd expansion in the global oil market this year, and US crude output could overtake that of Saudi Arabia and even get close to Russia, IEA data show. To make matters worse, another year of production cuts would have little effect on oil inventories – which the agency says are still 90mn barrels above Opec’s target.

While the US gains, there are others that are still suffering. The IEA expects Venezuela’s troubles to worsen after its 2017 production fell to the lowest in nearly 30 years.

“Given Venezuela’s astonishing debt and deteriorating oil network, it is possible that declines this year will be even steeper than the 270,000 bpd in 2017,” the report said. Yet, the IEA doesn’t see a “clear sign yet of Opec turning up the taps to cool down oil’s rally” or “compensate for a precipitous drop in supply from Venezuela.”

Opec and its partners are meeting in Oman to review their strategy for clearing the global oil glut. Ministers from the United Arab Emirates, Iraq and Kuwait have said the deal needs to continue.